3rd HealthSouth CFO to plead guilty

A third former chief financial officer of embattled HealthSouth Corp. has agreed to plead guilty to fraud charges, bringing to nine the number of workers charged since the scandal was revealed three weeks ago.

Michael Martin, who was CFO of the Birmingham, Ala.-based outpatient surgery and rehabilitation giant from 1997 until leaving the company in early 2000, acknowledged Tuesday that he participated in a conspiracy to inflate profits by hundreds of millions of dollars over several years to help meet Wall Street earnings estimates.

A federal judge in Alabama, however, declined to accept Michael Martin's guilty plea, complaining it was made public before he was told he had the case. He said a hearing would be scheduled.

Martin's attorney could not be reached for comment.

The case against Martin follows similar admissions by his two successors as CFO--William Owens and Weston Smith--that they helped to cook HealthSouth's books under the orders of former Chief Executive Richard Scrushy, vastly overstating profits and assets for several years.

In bringing charges against other former employees, prosecutors have alleged the conspiracy inflated earnings by roughly $2.5 billion over more than five years.

Scrushy, who faces civil fraud and insider trading charges from the Securities and Exchange Commission, has not been charged with a crime. Prosecutors said Tuesday that more charges are expected in the case, and that Michael Martin is cooperating with the investigation.

The company's board fired Scrushy last week, and the civil charges could result in Scrushy being forced to pay tens of millions of dollars to the government and company. His attorney has said he is not guilty.

Separately, HealthSouth announced a series of governance initiatives to try to restore confidence in the company as it struggles to stay out of bankruptcy. The independence of some board members has been challenged because of business and personal ties to company founder Scrushy.

The guidelines call for a majority of the board to be independent from management; for non-management directors to meet at least twice a year and to pick a presiding director to lead such sessions; for directors to own at least $100,000 in company stock and adhere to conflict-of-interest policies; and for the board to evaluate its own performance.

The effect of these measures, however, is unclear. Many provisions, for example, merely would bring the company into compliance with the Sarbanes-Oxley law or proposed New York Stock Exchange listing standards.

Some, at least on the surface, wouldn't necessarily bring about significant change. One guideline, for example, said the board has established four standing committees: audit, compensation, corporate compliance and nominating/corporate governance. Last year's proxy statement indicated the board had such committees in 2001, headed by outside directors. Indeed, the audit committee consisted of three directors deemed independent under existing NYSE standards, though at least one had business ties to HealthSouth. That committee, the filing said, met separately from the entire board once in 2001.

"I'd say they're a day late and a dollar short," said Nelson Woodard of Dreman Value Management, which sold about 1.7 million HealthSouth shares after the fraud charges were filed. "They have to do it, but it's almost laughable. It has been such a disaster."